[2023] KETAT 954 (KLR)

Twiga Solar Technology and Solutions Limited v Commissioner of Customs & Border Control (Tax Appeal 410 of 2022) [2023] KETAT 954 (KLR) (Commercial and Tax) (10 November 2023) (Judgment)

Neutral citation: [2023] KETAT 954 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Commercial and Tax

Tax Appeal 410 of 2022

Grace Mukuha, Chair, E Komolo, Jephthah Njagi, T Vikiru & G Ogaga, Members

November 10, 2023

Between

Twiga Solar Technology and Solutions Limited

Appellant

and

Commissioner of Customs & Border Control

Respondent

Judgment

Background 1. The Appellant is a limited liability company duly incorporated in Kenya under the Companies Act, and whose principal business activity is supply of goods and services.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, 1995. Under Section 5 (1) of the Act, the Kenya Revenue Authority is an agency of the Government for the collection and receipt of all revenue.

3. The Respondent conducted a review of Appellant’s customs entries of solar water heating systems for the period November 2016 to October 2020 pursuant to Sections 235 and 236 of the East African Community Customs Management Act, 2004 (EACMMA).

4. The Respondent subsequently issued the Appellant with a demand notice of Kshs. 2,960,896. 30 on 3rd December 2021 on the grounds that the Appellant had misclassified the goods under tariff code 8419. 19. 00 instead of tariff code 8516. 10. 00, which attracts import duty of 25 per cent as well as VAT.

5. The Appellant lodged a review application on 26th January 2022 disputing the Respondent’s reclassification of the solar water heaters under tariff code 8516. 10. 00.

6. The Respondent issued a review decision on 1st February 2022 rejecting the Appellant’s review application on the grounds that it was filed late contrary to Section 229 of EACCMA, 2004, which stipulate that a taxpayer has 30 days to object to a demand.

7. Aggrieved by the review decision, the Appellant lodged a Notice of Appeal filed on 21st April 2022.

The Appeal 8. The Appeal is premised on the Memorandum of Appeal filed on 21st April 2022 stating the following grounds:-i.That the Appellant is dissatisfied with the demand notice of payment issued by the Respondent following the Respondent’s findings.ii.That the Commissioners used timelines to disregard the evidence availed against the findings.iii.That the Commissioners applied wrong tariff code on a component which is not applicable.iv.That the Commissioners disregarded the initial tariff as a misclassification.v.That the Commissioners failed to ascertain the current import and previous import as comparative but not imperative.vi.That the Commissioners continued to verify and clear the current imports on the initial tariff which was considered misclassification without posing any restrictions.vii.That the Appeal should be heard and a fair view be rendered for any tax liability due.

The Appellant’s Case 9. The Appellant’s case is also premised on its Statement of Facts filed on 21st April 2022 together with the attachments thereto.

10. The Appellant stated that the Respondent rejected its objection filed on 26th January 2022 on the ground that it was time barred having surpassed the 30 days window within which a taxpayer has a right to object, and proceeded to demand Kshs. 2,960,896. 30.

11. The Appellant submitted that it objected to the Respondent’s demand notice because the stipulated classification tariff codes were done by the Respondent and the Appellant’s agents, and were approved and goods cleared to destination for local sale.

12. That the Respondent’s December 2021 correspondence was sent to an email domain which had technical hitches and due to festive season it took time for the Appellant to resolve the domain technicalities as it closed for end year on 10th December 2021 without accessing the email.

13. That by the time the Appellant accessed the email in January 2022, thirty (30) days had lapsed and the Appellant could not reach its clearing agent in time to verify the demand letter for reconciliation with import documents, by which time the objection had been rejected.

14. That the Respondent’s contention on misclassification under tariff code 8419. 19. 00 is incorrect as the Appellant had declared the correct code and this can be confirmed against respective import entries for the period in question.

15. That the Appellant’s imported solar heaters solely depend on solar and not dual systems (solar and electric).

16. That the Appellant’s products do not have electric heating component and the water heaters are not classified under tariff code 8516. 10. 00, which attract import duty of 25 percent as well as VAT as stated by the Respondent.

Appellant’s prayers. 17. The Appellant prayed that the Tribunal annuls the Respondent’s review decision dated 1st February, 2022.

The Respondent’s Case 18. The Respondent’s case is premised on the following documents filed before the Tribunal: -a.The Respondent’s Statement of Facts dated 20th May 2022 and filed on the same date, together with the documents annexed thereto.b.The Respondent’s written submissions dated 26th January 2023 and filed on 1st February 2023, together with the legal authorities attached therewith.

19. The Respondent averred that its Customs Clearance Audit team conducted a review of customs entries of importers of solar heating systems for the period November 2016 to October 2020 pursuant to Sections 235 and 236 of the East African Community Customs Management Act 2004 (EACCMA).

20. That examination of the entries revealed that solar water heating systems imported by the companies amongst them the Appellant had an electric component and were therefore dual water heating systems classifiable under tariff code 8516. 10. 00.

21. That the Appellant classified solar water heaters incorporating electrical heating elements under tariff code 8419. 19. 00 instead of tariff code 8516. 10. 00, which attracts import duty of 25% plus VAT.

22. That the Respondent subsequently issued a tax assessment based on the tariff reclassification of dual solar heating system of Kshs. 2,960,896. 30 inclusive of interest, and issued a demand notice of the same on 3rd December 2021 pursuant to Sections 135 and 249 of EACCMA.

23. That the Appellant did not respond to the demand notice as guided by Section 229 of EACCMA.

24. That the Appellant filed the application outside the stipulated timelines without providing sufficient reasons for delay contrary to Section 229(3) of EACCMA.

25. The Respondent further averred that the Appellant received the assessment on iTax in time and even acknowledged receipt of the same on 7th December 2021.

26. That the reasons provided by the Appellant were not provided to the Respondent, and have instead been provided in the first instance before the Tribunal.

27. That the Appellant had the responsibility to fix any technical issues it had with the system and the same should not be used as excuse for failing to comply with the law considering that it was aware of the assessment and even acknowledged receipt.

28. That the Respondent sought guidance from the World Customs Organisation (WCO) on where to classify dual solar heating systems, and received advisory opinion which classified the products under tariff 8516. 10. 00 based on GIR 1 and WCO Explanatory Notes.

29. That General Interpretation Rules (GIR) as cited by the EAC Common External Tariff (CET) govern classification of goods. According to GIR 1, classification shall be determined according to the terms of headings and any relative section or chapter notes and, provided the headings or notes do not require otherwise, according to GIR 1 through to GIR 6.

30. That GIR 6 provides that ‘For legal purposes, the classification of goods in the subheadings of a heading shall be determined according to the terms of those subheadings and any related subheading notes and, mutatis mutandis, to the above Rules, on the understanding that only subheadings at the same level are comparable. For the purposes of this Rule, the relative Section and Chapter Notes also apply, unless the context otherwise requires.’

31. That further, the Harmonized Commodity Description and Coding System Explanatory Notes as well as the Additional Notes constitute the official interpretation of the CET and provide the scope of each heading under the EAC CET. In accordance with GIRs 1, 6 and Explanatory Notes, the Appellant’s products are classified under 8516. 10. 00

32. That Heading 8419 covers ‘machinery, plant or laboratory equipment, whether or not electrically heated (excluding furnaces, oven and other equipment of heading temperatures such as heating, cooking, roasting, distilling, rectifying, sterilizing, pasteurizing, steaming, drying, evaporating, vaporizing, condensing or cooling, other than machinery or plant of a kind used for domestic purposes.

33. That Heading 85. 16 covers electric instantaneous or storage water heaters and immersion heaters; electric space heating apparatus and soil heating apparatus; electro-thematic hair dressing apparatus (for example, hair dryers, hair curlers, curling tong heaters) and hand dryers; electric smoothing irons; other electro-thermic appliances of a kind used for domestic purposes; electric heating resistors, other than those of Heading 85. 45.

34. That Note (A) 3 to Heading 8516 classifies dual system heaters in Heading 8516, in which the water is heated either electrically or by connection to a fuel heated hot water system; they are often equipped with a thermostatic control to operate them electrically only when the alternative means is insufficient.

35. That Explanatory Notes to the Heading 8419 state that heading machinery covered under this heading may be heated by any system (coal, oil, gas, steam, electricity) except in the case of instantaneous water heaters and storage water heaters, including solar water heaters, domestic or not. If electrically heated, such appliances are excluded.

36. That Note (I) to Heading 8419 concludes that the apparatus described in the note (i.e., heating, or cooling plant and machinery) is essentially used industrially, but water heaters, including solar water heaters, domestic or not. If electrically heated, such appliances are excluded.

37. That the Respondent averred that the Appellant’s products have an electric component and are therefore considered dual water heating systems. A dual-system water heater operates under both solar power and electricity. The system can operate solely on electricity or solar energy. Without the electrical element, the system would not be effective in heating water when the solar energy is inadequate. However, the system would be work without the solar component.

38. That the Respondent has mandate to rectify any misclassification and set straight upon realizing that either its agent or the Appellant had been erroneously applying the tariff.

39. That further the Respondent averred that it has the right to recover taxes where the post customs audit reveals that taxes were short-levied, or erroneously refunded in accordance with Sections 135 and 249(1) of EACCMA.

40. That the Respondent averred the allegations of the Appellant as laid out in its Memorandum of Appeal and Statement of Facts are unfounded in law and unsupported in evidence.

Respondent’s Prayers 41. The Respondent prayed that the Tribunal finds that: -a.The Appeal be dismissed with costs.b.That additional VAT and duty assessments raised by the Respondent be confirmed and the principal taxes, interests and penalties be found due and payable as per the objection decision rendered by the Respondent.

Issues For Determination 42. The Tribunal having carefully reviewed the pleadings made by the parties, the supporting documentation and the submissions made, is the of the respectful view that the following are the issues that call for its determination in this Appeal: -a.Whether the Appeal is Validb.Whether the Respondent erred in reclassifying the solar water heaters imported by the Appellant from tariff code 8419. 19. 00 to tariff code 8516. 10. 00.

Analysis And Findings 43. Having identified the issues falling for its determination, the Tribunal wishes to analyze them as hereunder.

a.Whether the Appeal is Valid 44. The uncontested evidence placed before the Tribunal by the Appellant and the Respondent show that the Respondent issued a demand notice on the Appellant on 3rd December 2021.

45. The Respondent submitted that this demand notice was received by the Appellant on time and that, indeed, the Appellant acknowledged the same vide an email on 7th December 2021. This email correspondence is annexed to the Respondent’s Statement of Facts and not disputed by the Appellant in its pleadings.

46. The Tribunal notes that the Appellant filed a review application on 26th January 2022, which the Respondent submitted was late, being outside the 30 days period envisaged under Section 229 (1) of EACCMA.

47. The Respondent further submitted that the Appellant’s application for review was not allowed since it was not supported as envisaged under Section 229(3) of EACCMA, and the Respondent proceeded to issue a review decision on 1st February 2022.

48. The Tribunal notes that review decision and appeals therefrom are governed by Section 230 (1) and (2) of the EACCMA, which provide as follows:“230. (1)A person dissatisfied with the decision of the commissioner under section 229 may appeal to a tax appeals tribunal established in accordance with section 231. (2)A person intending to lodge an appeal under this section shall lodge the appeal within forty-five days after being served with the decision, and shall serve a copy of the appeal on the Commissioner.” (Emphasis added)

49. The Tribunal notes that the Appellant filed its Notice of Appeal and Memorandum of Appel on 21st April 2022, which is way more than 45 days envisaged under EACCMA, 2004, and that there are no intervening activities, explanations by Appellant, or indeed, application seeking to file out of time.

50. The Tribunal is further guided by its holding in the case of v Commissioner_Of_Domestic_Taxes-Tat_No.247_Of_2020-Judgement%5B2021%5DeKLR.pdf W.E.C. Lines Ltd v The Commissioner of Domestic Taxes [TAT Case No.247 of 2020] where at paragraph 70 while reiterating the holding in Krystalline Salt Ltd v KRA [2019] eKLR stated that:“Where there is a clear procedure for redress of any particular grievance prescribed by the constitution or an Act of Parliament, that procedure should be strictly followed. Accordingly, the special procedure provided by any law must be strictly adhered to since there are good reasons for such special procedures. The relevant procedure here is the process of opposing an assessment by the Commissioner.”

51. Accordingly, the Tribunal holds that having been filed out of time, the instant Appeal is invalid.

b.Whether the Respondent erred in reclassifying the water heaters imported by the Appellant from tariff code 8419. 19. 00 to tariff code 8516. 10. 00. 52. Having found that the instant Appeal is invalid, the Tribunal holds that the second issue for determination is rendered moot.

Final Decision 53. The upshot of the foregoing is that the Tribunal proceeds to make the following Orders:-a.This Appeal be and is hereby struck out.b.Each party to bear its own costs.

54. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 10TH DAY OF NOVEMBER, 2023. GRACE MUKUHA - CHAIRPERSONDR. ERICK KOMOLO - MEMBERJEPHTHAH NJAGI - MEMBERTIMOTHY VIKIRU - MEMBERGLORIA A. OGAGA - MEMBER